Fixed versus adjustable rate loans
With a fixed-rate loan, your monthly payment doesn't change for the life of the mortgage. The portion of the payment allocated to your principal (the actual loan amount) will go up, however, the amount you pay in interest will decrease in the same amount. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part monthly payments for a fixed-rate loan will increase very little.
At the beginning of a a fixed-rate mortgage loan, most of your payment is applied to interest. The amount paid toward your principal amount increases up slowly every month.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Reliance Mortgage Service, Inc at 562 320-0510 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, interest rates for ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARMs feature this cap, which means they can't go up over a specific amount in a given period. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment will not increase beyond a fixed amount over the course of a given year. Plus, almost all ARM programs have a "lifetime cap" — this means that your rate can't ever exceed the capped amount.
ARMs most often feature their lowest, most attractive rates toward the beginning of the loan. They usually provide the lower rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust. These loans are usually best for people who anticipate moving in three or five years. These types of ARMs benefit borrowers who will move before the loan adjusts.
You might choose an ARM to take advantage of a very low introductory rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they cannot sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at 562 320-0510. It's our job to answer these questions and many others, so we're happy to help!